Evaluating labor market targeted fiscal policies in high unemployment EZ countries

Two labor market targeted fiscal policies, a hiring subsidy and a wage subsidy for new hires of labor, are evaluated, and their macroeconomic effects compared with those of standard fiscal instruments. The analyses are based on an extension of a monetary, open economy, search and matching model in which a distinction between the wage negotiated by newly hired workers and incumbents is introduced. The model is estimated with Bayesian techniques using data for high unemployment countries of the EZ periphery (Greece, Ireland, Italy, Portugal and Spain). Posterior simulations show that, the labor market policies are not superior to standard fiÂ…scal expansions in stimulating a timely response of economic activity, and their output and employment-enhanching effects are dominant only in the long term and at the Greece and Portugal estimates. The consideration of a liquidity trap environment marginally reinforces these results, showing that expansionary policy actions triggering a deflation can be pro-cyclical when the interest rate zero-lower-bound binds.